Washington DC, December 3, 2008 — The Institute of International Finance sees risks to the economies of the Gulf Cooperation Council (GCC), but emphasizes that these remain localized and manageable given ample resources and improved macroeconomic fundamentals. The IIF forecast that after achieving record oil income in 2008 and 5.7 percent growth, the GCC economies will experience a sharp drop in oil revenues next year and a moderation in growth to a still solid 3.6 percent.

IIF Managing Director Charles Dallara said, "While there is no doubt that the GCC economies are being shaken by global economic developments, they are relatively well prepared to manage the difficulties. They are likely to continue to experience relatively solid growth and further substantial domestic development."

Mr. George Abed, IIF Special Advisor and Director of the Africa-Middle East Department, stated that, "We expect the GCC external and fiscal surpluses to narrow substantially in 2009 from their record levels in 2008. Soaring oil prices through July 2008 boosted hydrocarbon revenues, contributing to large fiscal and external surpluses, despite strong import and fiscal expansion. In terms of foreign assets of governments and banking institutions (i.e. excluding corporates), we estimate that for the combined GCC these will reach $1.47 trillion by the end of this year. However, our current global projections suggest an average oil price per barrel of around $56 in 2009 and this would probably lead to only a very small net addition to the region's foreign assets."

Mr. George Abed added that, "Traversing this period of financial turmoil and significant slowdown in the global economy, with sharply lower oil prices as its consequence, is the key near-term policy challenge. To be sure, the GCC region is facing the current situation from a far stronger position than in the past. Nevertheless, the GCC authorities need to take policy measures to address the expected growth slowdown, financial stress in certain segments of the banking sector, and the sharp correction in the property market that has set in."

IIF First Deputy Managing Director and Chief Economist Yusuke Horiguchi stated at a press conference that, "The slump in equities and real estate prices in the U.S. and Europe may have reduced the value of GCC sovereign wealth funds, while pressures have risen on Sovereign Wealth Funds to redirect their investments to the local markets."

The budget surplus will narrow substantially as a result of the decline in the average oil price to $56 per barrel in 2009. The IIF estimates the break-even oil price that will balance budgets for 2009 as follows: $36 for the UAE, $38 for Qatar, $48 for Kuwait, $51 for Saudi Arabia, $73 for Oman, and $74 for Bahrain.

Mr. Abed said that, "While GCC growth is slowing somewhat, there is a probable silver lining given that these economies have been overheating with growth above potential and inflation rising rapidly. We expect a notable slowdown of credit growth -” from levels that were excessive -” during the second half of 2008 and more visibly in 2009. This, combined with the recent strengthening of the dollar and some further decline in commodity prices, would lower average inflation from a peak of 12 percent in 2008 to about 8.0 percent in 2009."

The report noted that real nonhydrocarbon growth is continuing to outpace hydrocarbon growth in every GCC country except Qatar. The GCC is seeing booming construction activity, including sizeable government infrastructure projects, roads and port expansion, as well as private sector financed shopping malls, tourism, and real estate projects. The total value of the projects in progress or at the planning stage for the next five years is estimated at around $1.9 trillion (equivalent to 170 percent of the 2008 GDP), with infrastructure accounting for 65 percent of the total, followed by oil and gas 16 percent, petrochemicals 8 percent, and other sectors 11 percent. Together the UAE and Saudi Arabia account for almost 70 percent of the total value of the GCC project pipeline.

Mr. Horiguchi said that, "The region's transformation in recent years-”especially greater diversification and the cushion built up in the form of large official reserves and foreign assets-”should help it to absorb severe shocks. We remain confident that the impact on banks will be manageable, although some smaller institutions with significant consumer and real estate loans outstanding might face some stress. Banks in the region with higher government participation are likely to be supported by the ample volume of public resources available."

The report added that a major correction in the real estate market is taking place at this time in some GCC countries. House prices in the region have soared in tandem with domestic credit growth, but have begun to decline recently. This correction could cause stress in some localities in the GCC and in some segments of the market, for example, mortgage finance companies, although this does not pose a risk to overall financial stability.